Shares of apparel retailer The Gap(NYSE: GAP) jumped on Friday after the company reported financial results for the third quarter of 2024. As of 11:30 a.m. ET, The Gap stock was up about 9% but it had been up nearly 18% earlier in the day.
Gap's profits are surging
The big story here is that The Gap's Q3 profits were materially better than what investors had expected. The company's net sales growth of 2% was nothing to write home about. That said, investors were encouraged to see growth for most of its brands, including 5% same-store-sales growth for its Athleta chain. But the growth was still modest compared to its improvements with profitability.
Gap's Q3 gross margin was only slightly better than it anticipated but this led to a big outperformance for its operating profit. The company's Q3 operating margin was 9.3%. This was the best Q3 operating margin it's had in seven years and it led to a meaningful 42% jump in operating income.
Trading at roughly 11 times earnings going into its Q3 report, Gap stock was already cheaply valued. And with operating profits rising fast, investors are jumping into what they likely view as an undervalued investment opportunity.
The holiday shopping season is shaping up nicely
Many prominent analysts were raising their price targets for Gap stock today and commentary from management may have fueled the optimism. CEO Richard Dickson said that the "holiday is off to a strong start." And because of this, management increased its guidance for its full-year operating income.
The good news here for investors is that Gap's higher margins indicate it's discounting less merchandise. This is related to the company's improved inventory management. Inventory levels going into the holiday season are lower than they've been in years. And this improvement could continue to support higher profits, which is good for investors.
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Jon Quast has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
